Nvidia (NVDA) has undergone one of the most spectacular rallies any stock has seen over the past few years, with its shares hitting new record highs at a crazy rate. The company has benefited greatly from the growing adoption of cryptos, as demand for its graphics card skyrocketed following its new utilization in mining coins.
Simultaneously, the industry’s ongoing supply chain issues and shortages have further widened the disproportionally higher demand to supply gap, providing Nvidia with amazing pricing power.
The company has been trying to expand its total production capacity in an attempt to meet the underlying demand, which along with a consistently higher price mix, has resulted in rapidly growing revenues and juicier margins by the quarter.
While I adore the company and believe its products will play a key role in digitalization and AR/VR applications in the coming years, I remain neutral due to the stock’s rather rich valuation.
The company recently reported a very strong quarter, proving once again why its premium valuation could be somewhat justified. That said, with shares again surging in the coming days, the future upside for current shareholders has been rather compressed, in my view. (See Analysts’ Top Stocks on TipRanks)
Q3 Results
For its Q3 results, Nvidia recorded revenues of $7.10 billion, 50% higher compared to the prior-year period, and up 9% from the previous quarter. With economies of scale kicking for the semiconductor giant, Nvidia’s margins have constantly been expanding.
Gross margins were 67%, 30 basis points higher compared to Q2, and a whopping 150 basis points higher year-over-year. With record revenues and expanding margins, operating income and net income surged. Net income grew 13% sequentially and 62% year-over-year, and EPS climbed to $1.17.
Valuation
On the one hand, Nvidia’s growth is nothing but impressive. Being an industry leader, the company is set to benefit tremendously from numerous trends, some of which are still in their infancy. These include networking, EVs, robotics, quantum computing, and AR/VR platforms like Meta Platfroms’ (FB) developing Metaverse. For example, the company recently announced Omniverse Avatar, a technology platform for generating interactive AI avatars.
Furthermore, with the crypto-economy gaining increased adoption and coin trading near all-time highs, it’s highly unlikely that the ongoing shortage will be resolved anytime soon, suggesting that Nvidia’s pricing power will remain very powerful in the medium term.
That said, the stock is currently trading at a trailing P/E of 118, and a forward P/E of 64.1. For this reason, Nvidia’s total returns could be rather limited for current investors.
Additionally, capital returns remain tiny to compensate current investors from a potential valuation compression. The company’s dividend remains trivial and serves mostly as a token, while it’s questionable if buybacks at the stock’s current valuation levels would serve investors.
Wall Street’s Take
Turning to Wall Street, Nvidia has a Strong Buy consensus rating, based on 22 Buys and two Holds assigned in the past three months. At $359.09, the average Nvidia price target implies 4.7% upside potential.
Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.
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